9/21/2011 @ 12:00PM

George Kaiser's $10 Billion Bet

Denise’s parents brought her into the family business early. “At 7 years old my job was to weigh out quarter-ounces of pot,” says the 36-year-old of her rural Oklahoma upbringing. “I started using meth at 13.” Prison inevitably followed, but “it taught me nothing. No treatment, just more connections to do the bad thing.” For Melissa, 26, the drug use commenced at 11, courtesy of her stepfather. “I couldn’t see anything but getting high,” she says. Facing two decades in prison for manufacturing meth and endangering her children, now 8 and 3, Melissa seemed destined to bolster Oklahoma’s standing as the nation’s leader in female incarceration, driven largely by nonviolent drug offenses.

But both of these women and dozens more in Tulsa have been saved from lengthy prison sentences by a billionaire unknown to them and virtually anyone outside of Oklahoma. Over the past four decades George Kaiser, 69, has secretly built a $10 billion empire in energy, banking and private equity, zealously avoiding fanfare and the press. And now he is just as quietly giving it all away, endowing the George Kaiser Family Foundation with $4 billion-putting it on par with the John D. & Catherine T. MacArthur Foundation, the Gordon & Betty Moore Foundation and the Rockefeller Foundation–and pledging in time to hand over nearly all the rest. In the past year alone the foundation has doled out $100 million in grants to organizations such as Women in Recovery, which believes that it’s better for kids, moms and taxpayers to spend $20,000 on a year of intensive rehabilitation for Denise or Melissa, rather than $200,000 for ten years of imprisonment.

That group embodies Kaiser’s philosophy of investment-oriented philanthropy, which focuses on stimulating economic opportunity and attacking poverty by spending early on education and health care for those who need it most. Kaiser’s personal mission statement (inspired, he says, by Warren Buffett): “Those who have won the ovarian lottery by being born in an advanced society to loving parents have a special obligation to help restore the American Dream.” Nancy Roob, president of the Edna McConnell Clark Foundation, which partners with Kaiser on antipoverty efforts, says, “Kaiser is unique in how he operates. He’s dedicated not just to finding programs that work but willing to put up the funds needed to scale them.”

Kaiser’s low-key persona–it took several months of conversations to convince him to talk to FORBES merely about his philanthropy–manifests itself physically. He may rank 31st on this year’s Forbes 400, but his watch is a $20 Casio. He insists on flying coach (his wife once sent him a drink from first class), and his office at the headquarters of Kaiser-Francis Oil, crammed with teetering stacks of papers, is fit less for an oil tycoon than for a math professor. Which is appropriate because his approach is centered less on religion or nostalgia than on rational problem solving. Even highly objective businesspeople, he says, “don’t analyze with a fresh sheet of paper looking at the most important need.”

The exception, in Kaiser’s eyes, was the analytic model put forward by Bill and Melinda Gates, who calculated, correctly, that the most efficient way to save lives was through massive vaccination campaigns in places like Bangladesh and Africa. Kaiser, after talking with Bill Gates, is now attempting to address a corollary that dates back to the writings of Malthus: Saving people is just the first step; without stimulating economic activity you’re simply creating an impossible number of mouths to feed.

Although Tulsa is vastly better off than Tanzania, Kaiser has decided to start locally, where it is far easier to monitor results and learn lessons than it would be working with aid organizations on the other side of the world. “Maybe the true reason is that this is the community that took me and my family in from Nazi Germany, and we owe something back,” he says. His father, Herman, was a judge in Germany until the Nazis disbarred Jews in 1935. His parents fled first to England in 1938, then in 1940 moved to Tulsa, where Herman’s aunt and uncle had already settled. Herman went into business with them at what became Kaiser-Francis Oil Co. Kaiser was born there in 1942.

The oil company successfully drilled in Kansas. Young George went to Harvard, with dreams of joining the foreign service, but his father’s heart attack pressed him into assuming management of the oil company in 1969. He’s been running the show ever since, expanding it into a sizable independent oil and gas producer. He’s the biggest shareholder and chairman of Bank of Oklahoma, oversees a massive private equity portfolio and makes bets on new technology to ease U.S. dependence on foreign oil, a sideline that’s attracting some unwanted attention in Washington, especially given his large-scale support for President Obama (see box, p. 188).

His experience taught him that “rich, smart parents tend to have rich, smart kids–not because it’s genetic but because they can create a home environment and sensory stimulation that lower-income kids often don’t get,” he says. “If you are born into poverty, the chances are good that your children will be born into poverty.” The solution: “Find a way to give poor kids the same cognitive stimulus that rich kids receive and they should end up with the same tools for success.” Nobel Prize-winning economist James Heckman at the University of Chicago figures the rate of return on investment in early education at 15% per annum.

Oklahoma, like a lot of places in America, has universal preschool, but it begins only at age 4, at which point many poor kids are so far behind their rich peers that they’ll never catch up. Early Head Start programs for infants and toddlers offer slots for only 3% of Tulsa’s 10,000 low-income kids, a rate similar to the national one. “Reaching 50% wouldn’t be impossible, at $30 billion per year,” says Kaiser, except it would never happen because “the dispossessed don’t have many lobbyists.”

Philanthropists will have to meet the need. Not one to reinvent what has already been built, Kaiser sought out other early-education backers. In Chicago he found Irving Harris, a philanthropist who 30 years ago helped found early-ed programs like Ounce of Prevention, Early Head Start and Educare. In Tulsa Kaiser brainstormed with prominent philanthropists including the billionaire Schusterman family (founders of Samson Resources), who had funded a number of infant/toddler programs through the Community Action Project. And he’s teamed up with Bill Gates and Susan Buffett, daughter of Warren, who has been instrumental in developing 20 Educare centers across the country. “I’d fight for the opportunity to be president of the George Kaiser fan club,” Buffett tells FORBES.

Educare is Kaiser’s favorite project. No matter how rich you are, it’s unlikely your children went to a preschool as grand as these. It starts with beautifully designed, light-filled buildings erected in the poorest parts of town. Classrooms and play areas are filled with the highest-quality educational toys, books, games, puzzles. Rooms average 15 kids and 3 teachers, who often have graduate degrees in early childhood education. They focus on increasing kids’ cognitive abilities through sensory stimulation and “serve-and-return” interaction–a child does something and you do something back. They even visit students’ homes to make sure they’re being brought up in a healthy environment.

Parents are encouraged to keep them there all day–from as early as 7 a.m. to as late as 6 p.m.–in order to achieve the best results. The facility becomes a kind of community center for the students’ families, including parenting and career training, medical care and even cooking classes. “This is really my support system,” says one mom. (Some, unfortunately, get the wrong idea: “It makes you want to have more kids,” says another parent, already the mother of six.)

All this costs a lot of money. Kaiser’s foundation put up $18 million to help build Tulsa’s first two Educares (with a third on the way) and a dozen other locations across the country. Millions more from Kaiser go to help pay annual costs that surpass $20,000 per child (roughly $7 million for the 340 children served in Tulsa so far). They tap state and federal funds and other Oklahoma donors to cover the rest. To fill those great facilities with great teachers, Kaiser’s foundation donates $1.2 million a year to Tulsa Community College and the University of Oklahoma to fund programs to train early ed specialists. If young teachers work in Oklahoma for four years after graduation, they’ll get their tuition reimbursed in full.

The efforts extend into Tulsa’s public school system as well. Kaiser’s foundation has partnered with the Gates Foundation to reform public schools, pushing through rules that make teachers accountable for their students’ success. They have also put up $1 million a year to help bring 150 young teachers to Tulsa from the Teach for America program. To house them Kaiser’s foundation has invested millions more in turning Tulsa’s decrepit warehouse district into a hip neighborhood of subsidized loft apartments (and $12 million to beautify Tulsa’s stretch of the Arkansas River).

In breaking the cycle of poverty, health care is almost as important as education. Kaiser was shocked to hear of the 14-year difference in life expectancy between Tulsa’s richest and poorest ZIP codes. Habits, diets, drugs, a lack of good grocery stores and simple income disparity all contribute to the gap, but the biggest problem, says Kaiser, is that not enough doctors were interested in serving poor folks. “We have health care rationing now, rationed to those rich enough to pay for it,” Kaiser says.

How to get more doctors into poor communities? Kaiser donated $62 million to the University of Oklahoma-Tulsa’s campus to create the School of Community Medicine, piggybacking on an earlier $20 million donation from the Schusterman family. Students work to set up and staff clinics in schools and housing projects across town. As with the program to train teachers, doctors can get all tuition reimbursed after working five years in the community. Dr. Gerard Clancy, president of the University of Oklahoma-Tulsa’s branch and former dean of its College of Medicine, says they are attracting mature students who “self-select” for altruism and are ready to work in tough conditions. One is an Iraq war vet; another was homeless as a child.

By the time the program is fully under way, Clancy says, they will have 300 doctors working for Oklahoma’s poor. So far, after just three years, 87% of patients have reduced their blood pressure and markers for diabetes and heart disease into normal ranges. They’re using emergency rooms 32% less than other impoverished citizens. Crucially, patients with mental illness have seen their days of hospitalization fall from 41 per year to 3, and jail time has been cut in half. Again, Kaiser’s initial donation opened up other funding streams–with the state set to match $47 million.

Kaiser’s foundation scours the country for other innovative programs he can integrate into Tulsa. He’s put $500,000 a year into Save USA, which helps poor families build their savings account by matching the funds they put aside dollar for dollar. And another $500,000 went into Center for Employment Opportunities (CEO), which finds transitional jobs for people coming out of prison and pays the first 15 weeks of wages.

His future giving will be informed by the performance of current projects. About 20% of the funds designated for programs goes into monitoring participants and quantifying effectiveness. Some, like Women in Recovery, don’t take long to prove their worth and are being expanded–first to Oklahoma City, then elsewhere. Kaiser wants his foundation’s obligations to grow: “In the charitable world as in the business world, opportunities should drive budgets, not the other way around.”

To Kaiser what hangs in the balance is no less than the definition of what it means to be an American. “From the days of our founders the social contract of the United States has been equal opportunity. A newborn child bears no responsibility for the circumstances of her birth and yet is often destined to a life of advantage or disadvantage based on those circumstances. The American commitment to equal opportunity is not being fulfilled,” he says, as passion fills one of the world’s most understated billionaires. “With what we know, it is morally offensive not to act.”